Comments on: Those underperforming bond funds

By: Dan

Dan — Wed, 26 Aug 2009 02:31:28 +0000

If high frequency trading programs are front-running big bond funds, and they doubtless are since this is a massive market to exploit, then this would help explain their across-the-board below-index performance.

By: Brad Ford

Brad Ford — Mon, 24 Aug 2009 18:08:27 +0000

I would think it is nearly impossible to beat an index that doesn’t have a realistic expense structure built into it.

Any bond fund that beats its index is likely to engage in:
a.) Madoff’ing the books; or
b.) Taking on additional risk.

By: David Merkel

David Merkel — Mon, 24 Aug 2009 17:55:48 +0000

Right, Felix. There aren’t many, if any, true index funds for bonds — managers try to replicate the index, because one can’t always source the exact bonds in the index, so a manager buys brothers and cousins, and attempts to match the major risk factors of the index, taking small tactical mismatches where he dares.

Expenses are the main difference in long term for bond funds. Security selection is secondary.

One other note: during bull phases, active managers and enhanced indexers tend to beat the indexes — research that neglects big bear phases such as we have just had gets trotted out to justify fees.

Unless you are really clever, and don’t have a constrained mandate, it is very hard to beat the indexes. Fuss and Gross do it, but few others.

By: wcw

wcw — Sat, 22 Aug 2009 22:34:15 +0000

ETFs are 40-Act funds in disguise, which means they have to present you standardized performance — and they do. See http://us.ishares.com/content/stream.jsp ?url=/content/repository/material/perfo rmance_report/monthly_performance_report .pdf&mimeType=application/pdf The ishares AGG over 5 years is 17 bps behind its index over 5 years, and TLT is 7 bps behind (Treasuries are easier to trade than corporates). Yes, bonds are harder to index. But it can be done, and BGI is doing it.

Full disclosure: I know a number of people who work for BGI, and I like them.

By: Jim

Jim — Sat, 22 Aug 2009 21:22:21 +0000

Hmmm. I’m sure I’m missing something, because I read your blog all the time and you know a ton more about bonds than I do. But…

According to Vanguard’s website, their Intermediate Term Treasury Index fund has returned within a few bps of their Barclay’s benchmark over the life of the fund. They show at most ten or twenty bps of shortfall.

Obviously for foreign/emerging market bonds, passive investing is tough to impossible, but for US bonds, I thought passive options were numerous and straightforward and could be counted on to track their benchmark +- a few bps for expenses.